Craig Redcliffe, EY
1 April 2022Article

Renewals: a Bermuda perspective

Emerging risks, the impact of COVID-19 (especially as litigation gets back on track following lockdown lulls) and an increasingly analytical, circumspect approach to risk are just some of the themes impacting reinsurance renewals—and Bermudan reinsurers are playing to their strengths, offering innovation and constructive solutions based on world-class expertise. Buyers, meanwhile, can expect more scrutiny than in previous years.

“With the renewal season so far (and it may be setting the trends for what’s to come) people are taking a very close look at the viability of the risks they have been writing—even those they’ve been writing for many years,” says Alan Waring, director, Amwins Bermuda.

“They’re looking at the rate adequacy very closely, and people aren’t willing just to go in and compete blindly on business.

“Rates are continuing to move upwards, especially on anything that is colourful in any way—anything that has any prior history or any tougher risks where people might have taken a flyer in the past and maybe hoped this is a good year to write it.

“In general, the message is: we’re not going to risk as much capacity as we might have done in the past on any individual risks—and we’re going to make sure we’re getting something that we believe is an adequate rate for our participation.”

He adds that the pricing response from reinsurers very much depends on the client’s history.

“If you’re a really clean risk, you’ve been with the market for many years, and you’ve been loyal to your reinsurers, you may be getting a flat to moderate increase,” Waring says.

“If you’re a risk that has tended to come and go, you don’t have any particular loyalty to reinsurers, and you tended to be more of a price buyer, then you can expect significant rate increases, especially if you have a colourful loss history.”

Hugh O’Donnell, chief executive officer of Bermuda Brokers, agrees that prices are on the rise in certain areas but adds that many areas seem to be stabilising.

“Property cat is up (property everywhere is up) largely because results were no good and they will not get any better,” he says. “Commercial auto is up slightly but people perceive it as being a good place to be because of the pricing situation. At the same time there is a lot of inflation: social, supply side and other types of inflation. It’s a concern that many are not taking that into consideration or seemingly not paying proper attention.

“Non-standard private passenger auto is also seeing some hardening after rate reductions on the back of reduced traffic during COVID-19 times.”

Tim Shreeve, head of platform development at Ariel Re, notes that for any property cat underwriting operation in Bermuda, the summer wind renewals are a key date in the year to establish portfolio performance metrics, given the high premium volumes transacted and the capital-intense nature of the risk.

“The 2022 renewal is shaping up to be one of the most interesting in recent memory given the loss activity over the last few years, given the public disclosures around changing reinsurer and insurance-linked securities (ILS) fund risk appetites, and the apparent lack of change in required reinsurance protection in terms of structure and volume,” Shreeve adds.

“Much has been said about the retro market at 1.1 and this is an added ingredient to what looks as though it could be a challenging renewal for reinsurance buyers.”

Waring echoes these sentiments, adding that compression of capacity is in part driven by the availability of alternative capital, and also by the state of the retro markets, where things have tightened up.

“There are reinsurers not having as many places to lay off risk or as much risk as they might have previously,” he says. “Therefore, knowing that they have to write it 100 percent for their own account, they realise they have, from a supply demand point of view, less capital to deploy—and if we take Florida renewals, and Florida capacity, we can already see that the use of Florida aggregate on named windstorm is tight. People want to make sure they’re getting the best price they can get for any Florida aggregate they deploy.

“The updates in the RMS model seem to be having an impact, driving quite a bit in the loss expectancy side,” Waring adds. “Focusing on North America, when you add in the uncertainties around convective tornadoes and hail, markets are still trying to figure out how to model that properly and come up with loss forecasts. You then figure in the wildfire—wildfire exposure worldwide has increased dramatically, and people are trying to figure out how to model that.”

“People want to make sure they’re getting the best price they can get for any Florida aggregate they deploy.”

Political risk

An added factor is the war in Ukraine and the related uncertainties around political and international trade risks.

“All these factors are coming into play, with reinsurers imposing increasing discipline on themselves and therefore not necessarily being able to provide significant chunks of capacity at giveaway prices to their cedants,” says Waring.

“Therefore the insurers out front are starting to reflect this in their behaviour and certainly on tougher classes of business, there are insurers who are saying: ‘I’m done with a class of business’. They’re choosing now either to pull out of certain things that they can’t make money on, or they pull back their capacity and push their price up.”

On the casualty liability side, Waring notes that one of the key factors is the uncertainty about what will happen as the courts now are opening up and litigation starts to flow through again; he suspects there may be some in the market who have a rose-tinted view of the performance on liability accounts, simply because there have not been the claims for the last two or three years due to the courts being backed up or not open.

“There are others who are fully aware that there’s a backlog of things to come, and they’re being very cautious about what they’re writing and how they’re writing it, because they know that it’s not reflected in what they’re seeing in their submissions,” he says.

“When you add all these uncertainties together, markets understand that there’s an awful lot of unknowns out there. There are unknowns in different places at the same time, and they have to be aware and ready for the fact that any range of unknowns could become nasty knowns at the same time, and they need to manage their capital so they don’t get overexposed in multiple areas, all at the same time, and therefore compromise their claims-paying ability.”

In terms of emerging risks, Shreeve says that Ariel Re is currently considering credit risk with respect to some of the smaller Florida buyers.

“The market they operate in has been extremely challenging in the last few years and many are under financial pressure,” he says. “We are ready to work with our clients over the next few months to provide them the reinsurance capacity that we provide year in, year out, but at the same time we have no appetite for abnormal credit risk on premium payments.”

Waring predicts a very interesting renewal season throughout the year. He notes that for liability, there has, over the last couple of years, been a tendency for carriers to limit aggregated exposure.

“So, for example, with abuse and molestation risk, you have carriers who recognise that you used to be able to have that included within your liability insurance—but now they’re imposing inner aggregate limits; so you might get a general liability cover, but then you impose aggregates on certain elements of the cover, whether it’s abuse and molestation or some form of professional liability, whatever it might be.

“We’ll probably see an increasing amount of that, where some might exclude it entirely, but some, in recognising that certain types of clients have to have cover, will then impose inner aggregates or inner limitations to the scope and amount of cover that’s being provided.”

Bermuda's position

O’Donnell gives a straightforward summary of the current climate: “If it costs more for your reinsurance you have to charge more for insurance—it has always been that way. The difference is now many companies don’t need to buy much reinsurance, more are willing to take a bigger retention.

“Bermuda’s particular strength is ease of doing business and proximity to each other, professional services and regulators in a beautiful place. One particular challenge is the changing international tax background and its being expensive and somewhat inflexible to bringing in employees,” he says.

Waring adds that since the mid-1980s, Bermuda’s strength has consistently been the ability to create solutions to very difficult, and in some cases almost unsolvable, problems.

“We have certainly seen an increasing flow of requests from clients to provide some form of solution to a risk-taking problem they have,” he says. “For some clients, it might be the need to provide proof of cover, and you work with them to create some form of captive or risk-retaining programme where they’re able to show a proof of insurance.

“In other cases, it’s a line of cover where they have to take a huge deductible just to get insurance in the market, and they need a mechanism to manage that deductible.

“Other times, they need a market to come in and help them provide capacity, and Bermuda doesn’t have such severe constraints as, say, in the US regulated environment and the admitted environment where your policy form and your rate are all dictated by the regulator—that is a challenge when it comes to then solving a client’s problem.

“The surplus lines marketplace grew in the US to allow that with freedom of rate and form, but that freedom of rate and form has to survive within a distribution system where controls are needed by the companies,” he explains.

Waring agrees with O’Donnell that one of Bermuda’s great strengths is direct access to a wealth of experts within a small area.

“Here in Bermuda, when you come in with a problem you’re generally talking to the senior underwriting person or a person who works closely with them,” he says. “You have to go through very few levels to talk to the main person who has the authority to come up with a solution.

“That’s what continues to be a core strength of Bermuda. If you have the reinsurance buying manager from a major global cedant, or a risk manager from a major corporation or a chief financial officer coming here, they have people who can create solutions, who understand risk well enough—and that to me continues to be Bermuda’s biggest strength, especially at times like this, when a lot of the rest of the world in the standard insurance market is tightening up.”

Waring predicts more of the same, certainly through the next couple of years, with a lot of common sense prevailing in risk-taking and use of capital.

“Naïve capacity will pop up here and there, but I think it’s less so because we’re in such a global world and information travels very quickly now,” he concludes.

“It’s a hardening market, but you must look at the full picture.”

The hard sell

Many in the industry are saying they are now in a hard market. Bermuda:Re+ILS asked Craig Redcliffe, regional insurance leader at EY, for his view.

A hard market is where you’re getting a return well above your cost of capital. I’m not sure we are in this position, for two reasons:

1) the inflationary environment will drive up costs to pay for losses; and

2) I don’t think climate risk has been fully factored into the models.

Is this a permanent shift or a temporary blip? In the past number of years, we have seen a number of events that have occurred that can be characterised as climate-related losses—hurricanes, wildfires and tornadoes—they’ve all been “above average”.

When is it just a “normal” year and not an above-average year? Or, is this a new normal? What I mean by a permanent shift is the inflated climate losses, as opposed to a temporary blip in climate shifts. I do not have the answer to this question, but it is a question that is being considered in many boardrooms.

In today’s environment, at least, I don’t believe the pricing models have properly factored in the increased risk of climate loss. So I would argue that the returns being generated are not sufficient to compensate for that risk.

Related to the inflation point, when there’s inflation running rampant and there are supply-chain issues, yes, we are seeing premiums going up, but if you get a 6 percent increase in premiums but your loss cost trend is increasing 10 percent, you’re worse off relative to the prior year.

We often look at it on the basis that premiums are increasing, so it’s a hardening market, but you must look at the full picture—am I actually generating a return on equity sufficient to compensate for the risks I am taking on (which includes climate risk and inflation risk)?